How investors manage impact

Managing the impact of an investment, or portfolio of investments, means taking into account the positive and negative impacts of the underlying enterprises/assets, as well as the investor’s own contribution.

Investors have different intentions and constraints, which influence the impact goals they set and how they manage performance. This page describes widely agreed-upon norms for communicating the impact goals of a portfolio and constructing a portfolio to meet them.

Why do investors manage their impact?

Investors have a range of values and motivations, and therefore various impact intentions. All these intentions, however different, call for high quality impact management based on shared norms.

Some investors are motivated to manage impact because the creation of positive change for people and planet is why they exist. Some are driven by a concern about regulatory and reputational risk. Some see it as a way to unlock commercial value — for example, backing enterprises that are cost-cutting through energy savings or increasing customer loyalty. And some just believe that use of the capital should align with their personal values.

Depending on their motivation, investors’ intentions therefore range from broad commitments, such as “to mitigate risk”, “to achieve sustainable long-term financial performance”, or “to leave a positive mark on the world”, to more detailed objectives such as “to support a speciﬁc group of people, place, outcome” or “to address a specific social or environmental challenge”. Each of these intentions relates to one of three types of impact: A, B or C.

A. At a minimum, investors can choose enterprises that act to avoid harm to their stakeholders, for example decreasing their carbon footprint or paying an appropriate wage; such ‘responsible’ enterprises can also mitigate reputational or operational risk (often referred to as ESG risk management), as well as respect the personal values of their asset owners.

B. In addition to acting to avoid harm, investors can also favour enterprises that actively benefit stakeholders, for example proactively upskilling their employees, or selling products that support good health or educational outcomes; an increasing range of these ‘sustainable’ enterprises are doing so in pursuit of financial outperformance over the long term (often referred to as pursuing ESG opportunities).

C. Many investors can go further: they can also investing in enterprises that are using their full capabilities to contribute to solutions to pressing social or environmental problems, such as enabling an otherwise underserved population to achieve good health or educational outcomes or hiring and upskilling individuals who were formerly long-term unemployed.

How do investors set impact goals?

Investors set goals about the impacts they do, or don’t, want underlying enterprises/assets to have on people and the planet, as well as the contribution they want to make to enable that to happen.

Investors’ intentions across the ABC of impact map to specific impact goals across five dimensions: what, who, how much, contribution and risk.

What outcomes people and the planet experience and how important those outcomes are to those experiencing them.

Find out more about the five dimensions of impact performance on the What is Impact? page.

By being clear about their impact goals, investors can review their portfolio to assess whether the enterprises/assets they are invested are – or are not – achieving those goals.

Investors also set goals about the contribution they want to make to enable enterprises they invest in to have an impact.

Investors can use a range of strategies to contribute to impact, often in combination. They can:

Signal that measurable impact matters: A commitment to factoring in the impact an enterprise has, such that – if all investors did the same – it would lead to a ‘pricing in’ of social and environmental effects by the capital markets. Often referred to as values alignment, this strategy expresses the investors’ values and is an important baseline. But alone, it is not likely to advance progress on societal issues when compared to other forms of contribution.

Engage actively: Investors can use expertise, networks and influence to improve the environmental/societal performance of businesses. Engagement can include a wide spectrum of approaches – from dialogue with companies, to creation of industry standards, to investors taking board seats and using their own team or consultants to provide hands-on management support (as often seen in private equity). This strategy should involve, at a minimum, significant proactive efforts to improve impact.

Grow new or undersupplied capital markets, by anchoring or participating in new or previously overlooked opportunities. This may involve more complex or less liquid investments, or investments in which some perceive risk to be disproportionate to return.

Provide flexible capital, by recognizing that certain types of enterprises do require acceptance of lower risk-adjusted financial return to generate certain kinds of impact. An investor’s constraints often dictate which of these strategies is employed. The diagram below illustrates a few examples of how intentions and constraints drive different combinations of strategies that investors use to contribute to impact.

What data is needed to understand the impact of an investment?

The impact of an investment, or portfolio of investments, is driven by the impacts of the underlying enterprise(s)/asset(s), plus the contribution that an investor makes to enable those impacts. All enterprises have effects on people and the planet, positive and negative, intended and unintended. The impact of those effects can be understood by looking at performance across five dimensions, based on measurement and analysis of 15 types of data.

Read norms for how data about the impacts of an individual enterprise is collected, analysed and assessed in the enterprise section.

For a portfolio of enterprises, a complete ‘impact report’ or ‘impact statement’ includes data about an enterprise’s total impacts on people and the planet, with data about each effect of each enterprise arranged across the 15 impact categories. Since this may often result in too much data for an investor to review (especially in cases where investment products have hundreds of underlying assets), the intermediary managing the portfolio of enterprises may choose to create a consolidated ‘impact statement’ that highlights the impacts that are relevant to the investor’s goals, while still providing an appendix of all other positive and negative impacts of the portfolio.

For example, if the goals of a specific portfolio were to contribute to solutions to climate change, the investor would pull out the effects classified as ‘C’ from the underlying enterprises, where they relate to significant change in important outcomes for the planet that would likely not otherwise occur (as identified through the five dimensions). This can then be shared with the asset owners to provide a summary of impact performance relative to their specific goals.

For some investors (e.g. a passive retail investor), classification of performance, based on intermediaries’ measurement and analysis of enterprise-level data, is a more appropriate level of detail. See the next chapter for more information about how to classify the impact of investment products.

How do investors classify and communicate the overall impact of a portfolio?

The overall impact of a portfolio can be classified by considering the type of impact that the underlying enterprises/assets are having on people and the planet (the A, B or C), together with the strategies an investor uses to contribute to impact.

When intermediaries review enterprise-level data across the 15 impact data categories, they can classify each effect as A, B or C and then classify the impact of the overall enterprise as shown below.

The intermediary can then classify the overall portfolio based on the classification of each enterprise in the portfolio.

The Investor’s Impact Matrix brings together the impact of the underlying enterprises/assets in a portfolio (the ‘ABC’) and the contribution an investor makes to this impact. In this way, the impact of a portfolio of assets can be classified into one of 12 ‘impact classes’.

Much like financial asset classes are a helpful heuristic for quickly conveying whether the characteristics of an investment opportunity match an investor’s financial intentions, the boxes on this matrix are an equivalent shorthand for conveying whether the impact characteristics of an investment opportunity match an investor’s impact intentions. The Matrix can help investors to describe and communicate the impact characteristics of an investment opportunity. In this diagram they are populated by example investment archetypes.

Investments can be classified on the Matrix in two ways:

An investment’s (or portfolio of investments) impact goals. For most investors this will involve selecting one or two impact classes which align with the impact they expect or intend to contribute to through their portfolio. For other investors the range of the strategy could be broader and cover multiple impact classes. Where possible, investors are encouraged to indicate what proportion of assets-under-management they expect to allocate into each impact class, noting allocation thresholds where they exist.

An investment’s (or portfolio of investments) actual performance. When plotting the actual impact of investments on the matrix, investors are encouraged to indicate what proportion of assets-under-management is allocated into which impact class(es). To be transparent, and ease impact management decisions for their stakeholders, investors should display this information alongside their original goals. Where relevant and possible, investors can then explain to their stakeholders where and why performance might differ from the original goals.

There are several reasons performance might differ from goals, including:

Market availability of the type of investments sought.

Performance differing from expectation for individual enterprises.

Gaining a better understanding of what type of impact was most needed by a population or geography throughout the investment period and shifting goals accordingly to address this need.

Gaining a better understanding of what type of investment strategy is most effective at delivering against certain impact goals and shifting strategy accordingly to address this need.

An impact risk materialising. As risk isn’t factored into the matrix impact classes, if a risk materialises the impact occurring may be different to the original goal.

Finding that the impact of the portfolio is no classifiable on the matrix, perhaps because data is not available to ensure that negative effects are being mitigated, or perhaps because market distortion is occurring – e.g. flexible capital is provided for investments where it is not required.

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